When federal student loan borrowers resume making payments this September, IDR plans like REPAYE, PAYE, and IBR will look much different. By next summer, most IDR borrowers will be on the SAVE plan.
The good news is that things are largely improving for the better. For many, monthly bills will be lower. For others, forgiveness will come sooner.
The downside is that a time of transition can be confusing. Fortunately, despite names and terms changing, simplification is on the way.
REPAYE (Revised Pay As You Earn) vs. SAVE (Saving on a Valuable Education)
The most significant changes on the horizon are coming to REPAYE. Borrowers will see some changes happen right away, and other changes will happen in July 2024.
The big picture is that REPAYE is ending and will be replaced with SAVE. Think of this as a two-phase process.
Phase I starts with the repayment restart. REPAYE is still called REPAYE, but the calculations are a bit different. Borrowers still pay 10% of their discretionary income each month, but the discretionary income formula changes. Instead of using 150% of the federal poverty level in the calculation, the number jumps to 225%. For borrowers, this means a smaller monthly bill.
The next immediate change is that married borrowers who file their taxes separately can exclude spousal income from REPAYE calculations. This improvement makes REPAYE a better option for married borrowers.
Finally, REPAYE will start covering 100% of the excess interest the loan generates each month. The current REPAYE subsidy only covers 50%. For example, a $10,000 loan at 6% interest generates $600 per year in interest or $50 per month. In this example, if your REPAYE payment is $20, it means $30 per month in excess interest. In the past, REPAYE immediately forgives 50% of that interest, meaning our borrower has $15 immediately forgiven. Now, REPAYE/SAVE will cover all $30 of the monthly unpaid interest.
Phase II happens on July 1, 2024. REPAYE formally becomes the SAVE plan, and the remaining provisions of SAVE take effect. These provisions include earlier forgiveness for borrowers with smaller balances and lower payments for borrowers with undergraduate debt.
Digging Deeper into the SAVE Plan: For a deep dive into SAVE rules and a calculator to estimate SAVE payments, check out the SAVE calculator.
REPAYE/SAVE Enrollment and Eligibility
The vast majority of IDR borrowers will want to sign up for the SAVE plan.
To sign up, borrowers need to enroll in the REPAYE plan. Those already in REPAYE will get their payments automatically recalculated under the new terms. Once REPAYE formally ends, the borrowers on REPAYE will automatically be enrolled in SAVE. Borrowers can enroll in REPAYE or update their IDR enrollment on the Department of Education IDR enrollment page.
All Federal Direct Loans are eligible, including Federal Stafford (Subsidized and Unsubsidized), Graduate Plus, and Direct Consolidation. The one exception is that Direct Consolidation loans that include Parent PLUS loans are not eligible.
Borrowers with FFEL Loans and Perkins loans are not eligible. However, these borrowers can consolidate the debt into a federal direct loan to gain eligibility. Additionally, federal direct consolidation at this time should not reset progress toward student loan forgiveness.
Defaulted federal loans are also not eligible. However, the fresh start program will allow borrowers to resolve the default and enroll in REPAYE/SAVE.
PAYE (Pay As You Earn) Gets Sunsetted
PAYE was a noteworthy repayment plan because it offered the lowest monthly bill when it was first created.
With the creation of the SAVE plan, most borrowers won’t benefit from PAYE. SAVE will always offer lower monthly payments than PAYE. Additionally, more borrowers will qualify for $0 per month payments under SAVE.
The Department of Education policy is that no new borrowers can sign up for PAYE. However, those currently on PAYE can stick with this plan.
One reason that a borrower might stick with PAYE is if they have graduate loans and they are nearing the 20-year IDR forgiveness. On SAVE, a borrower with graduate debt must make payments for 25 years before earning IDR forgiveness. Borrowers chasing this form of forgiveness must balance the higher payments on PAYE against the earlier forgiveness for those with graduate debt.
IBR (Income-Based Repayment) Becomes a Rarely-Used Option
Borrowers on IBR pay 10% or 15% of their monthly discretionary income. The percentage depends on when they took out their first student loan. Those that borrowed after 2014 only pay 10%. Those with older loans pay 15%.
The IDR analysis will look almost identical to the PAYE analysis. REPAYE/SAVE is the cheaper and more affordable repayment plan for most borrowers.
The one exception is borrowers with graduate debt who are pursuing IDR forgiveness after 20 years. SAVE will make these borrowers wait 25 years.
The big difference between PAYE and IBR moving forward is that IBR will still be available for most borrowers, whereas PAYE disappears immediately for those not currently enrolled.
However, borrowers lose IBR eligibility after making 60 payments on SAVE after July 1, 2024. The purpose of this rule is to prevent graduate borrowers from making low payments on SAVE for 19 years and 11 months and then switching to IBR and trying to get forgiveness after 20 years.
The big decision for borrowers with graduate loans considering IDR forgiveness will be deciding between the lower payments of SAVE vs. the earlier forgiveness of IDR.
What about PSLF Borrowers? Borrowers pursuing Public Service Loan Forgiveness won’t have to worry about this issue. PSLF eligibility comes after 120 eligible payments (10 years worth). These borrowers can make payments on any eligible repayment plan, including SAVE.
ICR (Income-Contingent Repayment) Doesn’t Change Much
ICR was the first income-driven repayment plan, but it is also the worst one.
Moving forward, new students will not be able to enroll in ICR. However, borrowers with consolidated Parent PLUS loans can still sign up for ICR.
In the past, and under the new rules, consolidating Parent PLUS loans will be the only way to qualify Parent PLUS debt for PSLF or income-driven repayment.
Sadly, Parent PLUS loans cannot be eligible for REPAYE or SAVE. Thus, it remains critical not to consolidate Parent PLUS loans borrowed for your child with federal student loans borrowed for your education.
What if I Make Too Much for REPAYE/SAVE?
There isn’t an income cap for REPAYE or SAVE enrollment.
Borrowers with substantial incomes may have large payments, but there isn’t a salary cutoff for SAVE enrollment or calculations.
However, some borrowers may have incomes so large that other balance-based plans, such as the 10-year standard repayment plan, become more affordable.
Picking the Best Plan for the Restart
Despite the changes, things are pretty simple for most borrowers heading into the federal student loan payment and interest restart.
Most people will want to sign up for the REPAYE plan. It will have the lowest monthly payments, an interest subsidy, and eventually become the SAVE plan.
FFEL and Perkins borrowers should probably consolidate before the IDR Count Update deadline and sign up for REPAYE/SAVE.
Parent PLUS borrowers won’t be able to benefit from the new repayment plan. Their strategy hasn’t really changed.
Borrowers with graduate debt are the only ones who face a decision. They will need to compare the monthly savings of REPAYE/SAVE against 20-year IDR forgiveness. Notably, not all borrowers with graduate loans face this issue. If your loans are too old to qualify for PAYE or IBR for New Borrowers, REPAYE/SAVE will be the best option.
Frequently Asked Questions
Many of you have sent me emails with questions about how SAVE will impact your repayment strategy.
Here are some of the most common questions I’ve received:
No. Your progress toward loan forgiveness shouldn’t get reset by switching to SAVE. With the IDR Count Update scheduled for early next year, some of you will be very close to forgiveness.
Possibly. The new policy for the Department of Education is to only capitalize interest when required by statute. For borrowers on IBR, it will mean interest capitalization. If you are on PAYE, REPAYE, or ICR you should be able to avoid it.
Borrowers can take the necessary steps to sign up for SAVE right now.
When you sign up for any federal repayment plan, you are not committed to that plan. You have to certify income yearly for SAVE (which can be done automatically), but you don’t have to stay on SAVE for any duration of time.
Whenever there is a change to student loan rules, or student loans are in the news, servicers get swamped. Wait times will be longer, but if you have an important question about your loans, keep calling and keep waiting. Sometimes, it is your only choice.
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